ES Bancshares (ESBS) 10QSB 2007 Q2 Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMISSION

WASHINGTON, DC 20549

_______________________________________

FORM 10-QSB

_______________________________________

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

 OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

ES BANCSHARES, INC.

(Exact name of small business issuer as specified in its charter)

Maryland	20-4663714
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or organization)

68 North Plank Road, Newburgh, New York 12550

(Address of principal executive offices)

1 (866) 646-0003

Issuer’s telephone number, including area code

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    YES x     NO o.

State the number of shares outstanding of each of the issuer’s classes of common equity as of the latest practicable date.

As of August 9, 2007 there were 1,721,337 issued and outstanding shares of the Registrant’s Common Stock

Transitional Small Business Disclosure Format (Check One)   YES o    NO x.

ES BANCSHARES, INC.

FORM 10-QSB

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

PART I – FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets at June 30, 2007 and December 31, 2006	2
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007, and 2006	3
	Consolidated Statement of Changes in Stockholders’ Equity For the Six Months Ended June 20, 2007 and 2006	4
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Controls and Procedures	20
PART II – OTHER INFORMATION
Item 1.	Legal Procedures	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3	Defaults on Senior Securities	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 5.	Other Information	21
Item 6.	Exhibits	22
	Signatures	23

 ES BANCSHARES, INC.

CONSOLIDATED BALANCE SHEET

(Unaudited)

(In thousands, except share data)

	June 30,			December 31,
	2007			2006
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	2,232		$	2,734
Federal funds sold		11,886			11,609
Total cash and cash equivalents		14,118			14,343
Certificates of deposit at other financial institutions		5,497			5,746
Securities:
Available for sale, at fair value		7,740			9,443
Real estate mortgage loans held for sale		266			215
Loans receivable, net
Real estate mortgage loans		38,143			35,151
Commercial and lines of credit		13,146			10,903
Home equity and consumer loans		6,735			6,046
Construction loans		11,302			9,128
Deferred cost		372			344
Allowance for loan losses		(590	)		(581	)
Total loans receivable, net		69,108			60,991
Accrued interest receivable		507			515
Federal Reserve Bank stock		324			335
Federal Home Loan Bank stock		89			—
Goodwill		581			581
Office properties and equipment, net		707			741
Prepaid expenses		115			74
Other assets		55			55
Total assets	$	99,107		$	93,039
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	9,219		$	8,156
Interest bearing		78,377			73,318
Borrowed funds		84			53
Accrued interest payable		124			130
Other liabilities		629			440
Total liabilities		88,433			82,097
Commitments and contingencies
Stockholders’ equity
Capital stock (par value $0.01; 5,000,000 shares authorized;
1,721,237 shares of ES Bancshares, Inc.
issued at June 30, 2007, and 1,719,227 shares
issued at December 31, 2006)		17			17
Additional paid-in-capital		16,899			16,869
Accumulated deficit		(6,172	)		(5,845	)
Accumulated other comprehensive loss		(70	)		(99	)
Total stockholders’ equity		10,674			10,942
Total liabilities and stockholders’ equity	$	99,107		$	93,039

See accompanying notes to financial statements

2

ES BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(Unaudited)

(In thousands, except per share data)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2007			2006			2007			2006
Interest and dividend income:
Loans	$	1,272		$	793		$	2,421		$	1,410
Securities		92			99			191			182
Certificates of deposit		78			30			162			62
Fed Funds and other earning assets		117			120			279			226
Total interest and dividend income		1,559			1,042			3,053			1,880
Interest expense:
Deposits		892			533			1,768			907
Borrowed funds		1			—			2			—
Total interest expense		893			533			1,770			907
Net interest income		666			509			1,283			973
Provision for loan losses		5			18			9			50
Net interest income after provision for loan losses		661			491			1,274			923
Non-interest income:
Service charges and fees		81			22			154			41
Net gain on sales of real estate mortgage
loans held for sale		49			53			66			114
Other		11			2			24			4
Total non-interest income		141			77			244			159
Non-interest expense:
Compensation and benefits		449			434			935			922
Occupancy and equipment		155			168			316			320
Data processing service fees		43			35			84			68
Other		287			229			510			435
Total non-interest expense		934			866			1,845			1,745
Net (loss) before income taxes		(132	)		(298	)		(327	)		(663	)
Income tax expense		—			—			—			—
Net (loss)	$	(132	)	$	(298	)	$	(327	)	$	(663	)
Other comprehensive income (loss):
Net unrealized gain/(loss) on available-for-sale securities		37			(32	)		29			(59	)
Comprehensive income (loss)	$	(95	)	$	(330	)	$	(298	)	$	(722	)
Weighted average:
Common shares		1,719,760			1,719,190			1,719,495			1,719,183
(Loss) per common share:
Basic	$	(0.08	)	$	(0.17	)	$	(0.19	)	$	(0.39	)
Basic & diluted	$	(0.08	)	$	(0.17	)	$	(0.19	)	$	(0.39	)

See accompanying notes to financial statements

3

ES BANCSHARES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2007 and JUNE 30, 2006

(Unaudited)

(In dollars except, share data)

	Capital Stock Shares		Amount		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive (Loss)			Total
Balance at January 1, 2006		1,719,177	$	8,596	$	8,276	$	(4,418	)	$	(122	)	$	12,332
Exercise of  stock warrants		50		—		1		—	#		—			1
Stock based compensation, net		—		—		5		—			—			5
Comprehensive loss:
Net loss for the period		—		—		—		(663	)		—			(663	)
Net unrealized (loss) on available-
for-sale securities		—		—		—		—			(59	)		(59	)
Total comprehensive loss														(722	)
Balance at June 30, 2006		1,719,227	$	8,596	$	8,282	$	(5,081	)	$	(181	)	$	11,616
Balance at January 1, 2007		1,719,227	$	17	$	16,869	$	(5,845	)	$	(99	)	$	10,942
Exercise of stock warrants		2,010		—		20		—			—			20
Stock based compensation		—		—		10		—			—			10
Comprehensive loss:
Net loss for the period		—		—		—		(327	)		—			(327	)
Net unrealized gain on available-
for-sale securities		—		—		—		—			29			29
Total comprehensive loss														(298	)
Balance at June 30, 2007		1,721,237	$	17	$	16,899	$	(6,172	)	$	(70	)	$	10,674

See accompanying notes to financial statements

4

ES Bancshares, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

(Unaudited)

	For the Six Months
	Ended June 30,
	2007			2006
	(In thousands)
Cash flows from operating activities:
Net loss for period	$	(327	)	$	(663	)
Adjustments to reconcile net losses to net cash
provided by operating activities:
Provision for loan losses		9			50
Depreciation expense		80			100
Amortization of deferred fees, discounts and premiums, net		1			(5	)
Net originations on loans held for sale		15			450
Stock compensation expense		10			6
Net gain on sale of real estate mortgage loans held for sale		(66	)		(114	)
Changes in assets and liabilities
Increase in other assets		(32	)		(275	)
Increase in accrued expenses and other liabilities		184			91
Net cash used in operating activities		(126	)		(360	)
Cash flows from investing activities:
Maturity of certificates of deposit at other financial institutions		4,146			3,249
Purchase of certificates of deposit at other financial institutions		(3,897	)		(3,249	)
Purchase of available-for-sale securities		(1,000	)		(2,999	)
Proceeds from principal payments and maturities of securities		2,731			565
Net disbursements for loan originations		(8,126	)		(19,249	)
Purchase of Federal Home Loan Bank stock		(89	)		—
Redemption of Federal Reserve Bank stock		11			20
Leasehold improvements and acquisitions of capital assets		(46	)		(15	)
Net cash used in investing activities		(6,270	)		(21,678	)
Cash flows from financing activities:
Net increase in deposits		6,120			20,728
Proceeds of advance from line of credit		31			—
Proceeds from stock issuance		20			1
Net cash provided by financing activities		6,171			20,729
Net decrease in cash and cash equivalents		(225	)		(1,309	)
Cash and cash equivalents at beginning of period		14,343			10,801
Cash and cash equivalents at end of period	$	14,118		$	9,492
Supplemental cash flow information
Interest paid	$	1,776		$	858
Income taxes paid	$	—		$	—

See accompanying notes to financial statements

5

ES BANCSHARES, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

Note 1.   Commencement of Operations

On April 28, 2004, Empire State Bank, NA (the “Bank”) sold 1,650,000 shares of its common stock at a price of $10.00 per share, for an aggregate consideration of $16,500,000 (the “Offering”).  In addition, for every five (5) shares of common stock purchased by a subscriber in the offering, such subscriber received a warrant to purchase, within a three-year period, one (1) share of common stock at an exercise price of $12.50 per share.  The Bank commenced operations on June 28, 2004.

Note 2.   Holding Company Formation

On August 15, 2006, the Bank reorganized into a one-bank holding company structure (the “Reorganization”).  In connection with the Reorganization, the Bank formed ES Bancshares, Inc. (the “Company”), a Maryland corporation, to serve as the holding company.  The Reorganization was effected by an exchange of all of the outstanding shares of Bank Common Stock for shares of Company Common Stock (the “Share Exchange”).  Following the Share Exchange, the Bank became a wholly-owned subsidiary of the Company and former shares of Bank Common Stock represent the same number of shares of Company Common Stock.

Note 3.   Basis of Presentation

The consolidated financial statements included herein include the accounts of the Company and the Bank, subsequent to the elimination of all significant intercompany balances and transactions, and have been prepared by the Company without audit.  In the opinion of management, the unaudited financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and results of operations for the periods presented.  Certain information and footnote disclosures normally included in accordance with generally accepted accounting principles of the United States have been condensed or omitted pursuant to the rules and regulations of the SEC, however, the Company believes that the disclosures are adequate to make the information presented not misleading.  The operating results for the periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire fiscal year ending December 31, 2007.  The unaudited interim financial statements presented herein should be read in conjunction with the annual financial statements of the Company as of and for the fiscal year ended December 31, 2006, included in Form 10-KSB filed with the SEC.

The financial statements have been prepared in conformity with generally accepted accounting principles of the United States.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expense.  Actual results could differ significantly from these estimates.  Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, and the valuation allowance on deferred tax assets.

Note 4.   Summary of Significant Accounting Policies

Warrants

Effective April 15, 2007, the Company modified the terms of the warrants to purchase common stock of the Company by reducing the exercise price of $12.50 to $10.00 and extended the expiration date from June 28, 2007 to June 28, 2008.  There was no additional expense recognized as a result of the modification.  At June 30, 2007 the Company had 327,890 stockholder warrants issued and outstanding.  Additionally, there were 190,000 issued and outstanding organizer warrants as of June 30, 2007.  The

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organizer warrants are convertible into common shares at an exercise price of $10.00 and exercisable through June 27, 2009 and their original terms have not been modified.  The organizer warrants were valued at $323,000 and were expensed at the time of issuance in accordance with FAS 123. The fair value was determined using the minimum value method using the following assumptions: Grant date of June 28, 2004, $10.00 strike price, $10.00 fair value of a share of capital stock at grant date, risk-free rate of 3.8%, no dividends, five (5) year life and no volatility.

Stock Options

On October 19, 2004 the Board of Directors approved the adoption of the Company’s Stock Option Plan and option grants were made for 173,000 shares at an exercise price of $10.50 per share.  These options have a 10-year term and may be either non-qualified stock options or incentive stock options.  These options were not deemed granted until shareholder approval occurred on May 3, 2005.  Subsequently, incentive options on 10,000 shares at an exercise price of $10.00 per share, 6,250 shares at an exercise price of $10.50 per share, 5,000 shares at an exercise price of $10.00 per share, and 10,000 shares at an exercise price of $10.50 per share were awarded on November 15, 2005, December 20, 2005, January 12, 2006, and January 16, 2007, respectively.  Additionally, 5,000 non-qualified stock options at an exercise price of $10.50 were also awarded on January 16, 2007.  The options vest at a rate of 20% on each of five annual vesting dates except for 65,000 options granted to Directors, which vested immediately.  Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date.

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-based Payment” (“SFAS 123(R)”), using the modified prospective transition method.  Previously, the Company accounted for stock-based compensation under the fair value method of accounting in accordance with SFAS 123 prior to revision.  For accounting purposes, the Company recognizes expense for shares of common stock awarded under the Company’s Stock Option Plan over the vesting period at the fair market value of the shares on the date they are awarded.  The fair values of options granted are computed using the Black-Scholes option-pricing model, using the following weighted-average assumptions as of the grant dates.

	2007		2006		2005
Risk free interest rate		4.74%		4.35%		3.98%
Expected option life		5.0		5.0		5.0
Expected stock price volatility		0.10%		0.10%		0.10%
Dividend yield		0.00%		0.00%		0.00%
Weighted average fair value of options
granted	$	—	$	2.20	$	1.08

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A summary of options outstanding under the Bank’s Stock Option Plan as of June 30, 2007, and changes during the six-month period then ended is presented below.

					Weighted
			Weighted		Average
			Average		Remaining
			Exercise		Contractual
	Shares		Price		Term (yrs.)
Outstanding at
January 1, 2007		147,750	$	10.47		7.9
Granted		15,000		10.50		10.0
Exercised		—		—		—
Forfieited or expired		—		—		—
Outstanding at
June 30, 2007		162,750	$	10.47		7.6
Options exerciseable at
June 30, 2007		97,150	$	10.49		7.5

As of June 30, 2007, there was $48,844 of total unrecognized compensation cost related to nonvested stock options granted under the Stock Option Plan.  The cost is expected to be recognized over a period of approximately 33 months.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock warrants and options) were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.  Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of shares outstanding for the period plus common-equivalent shares computed using the treasury stock method. None of the 327,890 stockholder warrants, or 190,000 organizer warrants, or 162,750 stock options were considered in computing diluted earnings (loss) per share because to do so would have been antidilutive.

Income Taxes

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using tax rates.  Temporary differences are differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The tax benefit on net operating losses, included in deferred tax assets, was approximately $2.3 million at June 30, 2007.  The net operating losses are being carried forward and will be available to reduce future taxable income.  Realization of deferred tax assets is dependent upon the generation of future taxable income.  A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.  Because the Bank has no operating history, management recorded a valuation allowance against the total amount of deferred tax assets.

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Securities

The Company is required to report readily-marketable equity and debt securities in one of the following categories: (i) “held-to-maturity” (management has the positive intent and ability to hold to maturity), which are reported at amortized cost; (ii) “trading” (held for current resale), which are to be reported at fair value, with unrealized gain and losses included in earnings; and (iii) “available for sale” (all other debt and marketable equity securities), which are to be reported at fair value, with unrealized gains and losses reported net of taxes, as accumulated other comprehensive income, a separate component of stockholders’ equity.  The Company currently classifies all securities as available-for-sale.

Premiums and discounts on investments in debt and equity securities are amortized to expense or accreted to income over the estimated life of the respective securities using methods approximating the effective interest method. Gains and losses on the sales of securities are recognized upon realization based on the specific identification method.

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. All sales are made with servicing released and without recourse. Gains and losses on the disposition of loans held for sale are determined on the specific identification basis. Net unrealized losses on loans held for sale are recognized through a valuation allowance by charges to income.  There were no valuation allowances as of June 30, 2007.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees and costs on originated loans and any unamortized premiums or discounts on purchased loans. Loan origination and commitment fees and certain direct loan origination costs will be deferred and the net amount amortized as an adjustment of the related loan’s yield using methods that approximate the interest method over the contractual life of the loan. Loan interest income is accrued daily on outstanding balances.

Non-Performing Assets

Loans are reviewed on a regular basis, and are placed on non-accrual status when either principal or interest is 90 days or more past due, or, in the opinion of management, there is sufficient reason to question the borrower’s ability to continue to meet principal or interest payment obligations.  Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income related to current year income and charged to the allowance for loan losses with respect to income that was recorded in the prior fiscal year.  At and for the six-month period ending June 30, 2007, we had no non-accrual loans, nor did we have any non-accrual loans at and for the year ending December 31, 2006.

Classification of Assets

Regulations require that the Company classify its own assets on a regular basis and establish prudent valuation allowances based on such classifications.  In addition, in connection with examinations, OCC examiners have the authority to identify problem assets, and if appropriate, require that they be classified. There are three classifications for problem assets: substandard, doubtful, and loss.  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets, with the additional characteristics that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified loss is considered uncollectible and of such little value

9

that continuance as an asset on the balance sheet of the institution is not warranted.  Assets classified as substandard or doubtful require the Company to establish general allowances for loan losses.  If an asset or portion thereof is classified as loss, the Company must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge off such amount.  If a Company does not agree with an examiner’s classification of an asset, it may appeal this determination to the Regional Director of the OCC.  On the basis of management’s review, at June 30, 2007, the Bank had $275,686 of assets classified as substandard.  There were no assets classified as doubtful or loss.

Allowance for Loan Losses

The allowance for loan losses is increased by provisions for loan losses charged to income.  Losses are charged to the allowance when all or a portion of a loan is deemed to be uncollectible.  Subsequent recoveries of loans previously charged off are credited to the allowance for loan losses when realized.

The allowance for loan losses is a significant estimate based upon management’s periodic evaluation of the loan portfolio under current economic conditions, considering factors such as the Company’s past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, and the estimated value of the underlying collateral.  Establishing the allowance for loan losses involves significant management judgment, utilizing the best available information at the time of review.  Those judgments are subject to further review by various sources, including the Bank’s regulators, who may require the Company to recognize additions to the allowance based on their judgment about information available to them at the time of their examination.  While management estimates loan losses using the best available information, future adjustments to the allowance may be necessary based on changes in economic and real estate market conditions, further information obtained regarding known problem loans, the identification of additional problem loans, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that in management’s judgment should be charged off.

Cash Flows

Cash and cash equivalents include cash, deposits with other financial institutions, and federal funds sold.  Net cash flows are reported for customer loan and deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased.

Note 5.   Commitments and Contingencies

Legal Proceedings

The Company has not been a party to any legal proceedings, which may have a material effect on the Company’s results of operations and financial condition.  However, in the normal course of its business, the Company may become involved as plaintiff or defendant in proceedings such as judicial mortgage foreclosures and proceedings to collect on loan obligations and to enforce contractual obligations.

Operating Lease Commitments

The Company is obligated under non-cancelable operating leases for its main office location in Newburgh, New York and its branch office location in New Paltz, New York.  The leases are for initial terms of 10 years and 15 years, respectively and have various renewal options.  Rent expense under operating leases was $70,000 for the three months ended June 30, 2007.  At June 30, 2007, the future minimum rental payments under operating lease agreements for the fiscal years ending December 31 are $106,000 in 2007, $215,000 in 2008, $219,000 in 2009, $226,000 in 2010, $229,000 in 2011 and a total of $1.1 million for 2012 and thereafter. The Bank’s lease obligation for its Staten Island, New York and Lynbrook, New York lending offices is on a month-to-month basis at $800 per month.

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The Company also entered into a lease agreement for office space in Staten Island, New York at a cost of $2,700 per month where it plans on opening a full service branch banking facility, pending regulatory approval, prior to year-end.

Off-Balance Sheet Financial Instruments

The Company’s off-balance sheet financial instruments at June 30, 2007 were limited to loan origination commitments of $19.5 million (including one-to-four family loans held for sale of $1.9 million) and unused lines of credit (principally commercial and home equity lines) extended to customers of $11.1 million.  Substantially all of these commitments and lines of credit have been provided to customers within the Bank’s primary lending area.  Loan origination commitments at June 30, 2007 consisted of adjustable and fixed rate commitments of $14.3 million and $5.2 million respectively, with interest rates ranging from 5.00% to 10.00%.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Report on Form 10-QSB of the Company includes “forward-looking statements” within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, that are based on the current beliefs of, as well as assumptions made by and information currently available to, the management of the Company.  All statements other than statements of historical facts included in this Report, including, without limitation, statements contained under the caption “Management’s Discussion and Analysis” regarding the Company’s business strategy and plans and objectives of the management of the Company for future operations, are forward-looking statements.  When used in this Report, the words “anticipate”, “believe”, “estimate”, “project”, “predict”, “expect”, “intend” or words or phrases of similar import, as they relate to the Company or the Company’s management, are intended to identify forward-looking statements.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such expectations may not prove to be correct.  All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated, believed, estimated, projected, predicted, expected or intended including risks and uncertainties including changes in economic conditions in our market area, changes in local real estate values, changes in regulatory policies, fluctuations in interest rates, local loan and deposit demand levels, competition, our ability to control expenses, our ability to increase our lower cost deposits, our ability to execute our plan to attain profitability, and other factors.  The Company does not intend to update these forward-looking statements.  All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by applicable cautionary statements.

Comparison of Financial Condition at June 30, 2007 and December 31, 2006

Total assets at June 30, 2007 amounted to $99.1 million, representing an increase of $6.1 million, or 6.6%, from $93.0 million at December 31, 2006.  Asset growth during the period primarily reflected increases in total loans that were funded by deposit growth and decreases in securities available for sale.

Overall, total loans (loans receivable, net and mortgage loans held for sale) increased $8.2 million, or 13.4%, to $69.4 million at June 30, 2007 from $61.2 million at December 31, 2006.  During the six-month period commercial loans and commercial lines of credit increased $2.2 million, from $10.9 million to $13.1 million, home equity and consumer loans increased $689,000 from $6.0 million to $6.7 million, and construction loans increased $2.2 million, from $9.1 million to $11.3 million.  Commercial real estate mortgage loans increased $3.0 million, or 8.9%, from $33.6 million at December 31, 2006 to

11

$36.6 million at June 30, 2007, while residential mortgage loans, excluding mortgage loans held for sale, decreased $51,000 from $1.6 million to $1.5 million over the same six- month period.  Management may consider slowing loan growth in the future depending on economic, regulatory, deposit growth and capital considerations.

Total cash and cash equivalents at June 30, 2007 decreased $225,000 to $14.1 million from $14.3 million at December 31, 2006, while certificates of deposit at other financial institutions decreased $249,000 from $5.7 million to $5.5 million during the same period.  Total securities at June 30, 2007 decreased $1.7 million from $9.4 million at December 31, 2006 to $7.7 million.  Funds derived from the decreases in these asset classes were utilized towards the net increase in higher-yielding loans discussed above, in lieu of relying only on incremental higher-costing funding liabilities.

Interest earning deposits grew $5.1 million, or 7.0%, to $78.4 million at June 30, 2007 from $73.3 million at December 31, 2006.  The growth over the six-month period consisted of increases of $2.7 million in savings accounts and $2.7 million in certificates of deposit that were partially offset by decreases of $331,000 in money market accounts and $8,000 in NOW accounts.  Over the same six-month period non-interest bearing accounts increased from $8.2 million to $9.2 million.

Stockholders’ equity decreased by $268,000 to $10.7 million at June 30, 2007 from $10.9 million at December 31, 2006.  The decrease is primarily attributable to a net loss for the six-month period of $327,000 that was partially mitigated by a $30,000 increase in additional paid-in-capital that resulted mostly from the exercise of 2,010 shareholder warrants, and a decrease of $29,000 in the net unrealized loss in the market value of securities available-for-sale.

The ratio of stockholders’ equity to total assets decreased to 10.8% at June 30, 2007 from 11.8% at December 31, 2006.  Book value per share decreased to $6.20 at June 30, 2007 from $6.36 at December 31, 2006.  See “Liquidity and Capital Resources” for information regarding the Bank’s regulatory capital amounts and ratios.

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Analysis of Net Interest Income

The following tables summarize the Company’s average balance sheets for interest earning assets and interest bearing liabilities, average yields and costs (on an annualized basis), and certain other information for the three and six-month periods ended June 30, 2007 as compared to the comparable three and six-month periods ended June 30, 2006.  The yields and costs were derived by dividing interest income or expense by the average balance of assets and liabilities for the period shown.  Substantially all average balances were computed based on daily balances.  The yields include deferred fees and discounts, which are considered yield adjustments.

	For the Three Months Ended June 30,
	2007								2006
						Average								Average
	Average					Yield /			Average					Yield /
	Balance			Interest		Cost			Balance			Interest		Cost
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans	$	68,129		$	1,272		7.49	%	$	45,285		$	793		7.02	%
Fed Funds		8,653			112		5.19	%		9,276			114		4.93	%
Certificates of deposit		5,807			78		5.39	%		2,343			30		5.14	%
FRB Stock & FHLB Stock		329			5		6.10	%		367			6		6.56	%
Securities-available for sale		7,503			92		4.92	%		8,944			99		4.44	%
Total interest-earning assets		90,421		$	1,559		6.92	%		66,215		$	1,042		6.31	%
Allowance for loan losses		(586	)							(139	)
Cash & Due from banks		2,054								1,913
Other Non-interest earning assets		1,978								1,884
Total assets	$	93,867							$	69,873
Liabilities and  Stockholders’ Equity
Interest-bearing liabilities:
NOW accounts	$	1,187		$	2		0.68	%	$	629		$	1		0.64	%
Money Market accounts		47,621			595		5.01	%		28,822			332		4.62	%
Regular savings accounts		7,117			64		3.61	%		3,509			24		2.74	%
Certficates of Deposit		18,406			231		5.03	%		15,604			176		4.52	%
Total interest-bearing deposits		74,331			892		4.81	%		48,564			533		4.40	%
Borrowings		68			1		8.25	%		—			—		—
Total interest-bearing liabilities	$	74,399		$	893		4.82	%	$	48,564		$	533		4.40	%
Non-interest-bearing liabilities		8,827								9,514
Total liabilities		83,226								58,078
Stockholders’ equity		10,641								11,795
Total liabilities and stockholders’ equity	$	93,867							$	69,873
Net interest income				$	666							$	509
Average interest rate spread (1)							2.10	%							1.91	%
Net interest margin (2)							2.94	%							3.07	%
Net interest-earning assets (3)	$	16,022							$	17,651
Ratio of average interest-earning assets to
average interest-bearing liabilities							121.54	%							136.35	%

(1) Average interest rate spread represents the difference between the yield on average interest-earning assets and and the cost of average interest-bearing liabilities.

(2) Net interest margin represents net interest income divided by average total interest-earning assets.

(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

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	For the Six Months Ended June 30,
	2007								2006
						Average								Average
	Average					Yield /			Average					Yield /
	Balance			Interest		Cost			Balance			Interest		Cost
	(Dollars in thousands)
Assets
Interest-earning assets:
Loans	$	65,251		$	2,421		7.48	%	$	40,974		$	1,410		6.94	%
Fed Funds & other investments		10,253			268		5.20	%		9,145			215		4.74	%
Certificates of deposit		6,020			162		5.43	%		2,541			62		4.92	%
FRB Stock & FHLB Stock		351			11		6.32	%		372			11		5.96	%
Securities-available for sale		7,897			191		4.88	%		8,332			182		4.40	%
Total interest-earning assets		89,772		$	3,053		6.86	%		61,364		$	1,880		6.18	%
Allowance for loan losses		(584	)							(126	)
Cash & Due from banks		2,032								1,906
Other Non-interest earning assets		1,898								1,942
Total assets	$	93,118							$	65,086
Liabilities and  Stockholders’ Equity
Interest-bearing liabilities:
NOW accounts	$	1,014		$	3		0.60	%	$	643		$	1		0.33	%
Money Market accounts		48,374			1,202		5.01	%		23,985			521		4.38	%
Regular savings accounts		6,279			109		3.50	%		3,638			50		2.77	%
Certficates of Deposit		18,237			454		5.02	%		15,068			335		4.48	%
Total interest-bearing deposits		73,904			1,768		4.82	%		43,334			907		4.22	%
Borrowings		59			2		8.25	%		—			—		—
Total interest-bearing liabilities	$	73,963		$	1,770		4.83	%	$	43,334		$	907		4.22	%
Non-interest-bearing liabilities		8,449								9,751
Total liabilities		82,412								53,085
Stockholders’ equity		10,706								12,001
Total liabilities and stockholders’ equity	$	93,118							$	65,086
Net interest income				$	1,283							$	973
Average interest rate spread (1)							2.03	%							1.96	%
Net interest margin (2)							2.86	%							3.20	%
Net interest-earning assets (3)	$	15,809							$	18,030
Ratio of average interest-earning assets to
average interest-bearing liabilities							121.37	%							141.61	%

(1) Average interest rate spread represents the difference between the yield on average interest-earning assets and and the cost of average interest-bearing liabilities.

(2) Net interest margin represents net interest income divided by average total interest-earning assets.

(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

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Results of Operations for the Quarters Ended June 30, 2007 and June 30, 2006

General.    For the quarter ended June 30, 2007, the Company recognized a net loss of $132,000, or ($0.08) per diluted share, as compared to a net loss of $298,000, or ($0.17) per diluted share, for the quarter ended June 30, 2006.

Interest Income.  Interest income amounted to $1.6 million for the quarter ended June 30, 2007, as compared to $1.0 million for the quarter ended June 30, 2006.  The increase was primarily attributable to the increase in average interest-earning assets, which increased to $90.4 million for the quarter ended June 30, 2007 from $66.2 million for the comparable quarter ended one year earlier, and to the higher yields that were realized in 2007 as compared to 2006 that resulted from higher market rates subsequent to the series of well-publicized increases in short-term interest rates up to June 2006 by the Federal Open Market Committee.  The average yield on interest-earning assets for the quarter ended June 30, 2007 was 6.92%, which was 61 basis points higher than the 6.31% yield on the Bank’s interest-earning assets for the quarter ended June 30, 2006.

Average loan balances increased by $22.8 million, from $45.3 million for the quarter ended June 30, 2006 to $68.1 million for the quarter ended June 30, 2007, while the average yield increased from 7.02% to 7.49% over the same respective periods.  The average balances of the Bank’s securities available for sale and its fed funds decreased by $1.4 million and $623,000, respectively, over the quarter ended June 30, 2007 as compared to the quarter ended June 30, 2006.  The average yields on those respective interest-earning assets increased to 4.92% from 4.44%, and to 5.19% from 4.93%, over the same comparable periods primarily as a result of higher interest rates that were available to these short-term assets during the latter period.  The average balance and yield of the Bank’s certificates of deposit at other financial institutions for the quarter ended June 30, 2007 was $5.8 million and 5.39%, respectively, as compared to an average balance of $2.3 million and a yield of 5.14% for the comparable quarter ended one-year earlier.

Interest Expense.  Total interest expense for the quarter ended June 30, 2007 increased by $359,000 when compared to the same three-month period one year earlier.  The increase was primarily due to increases in short-term interest rates, and to the increase in the average balances of the Bank’s interest-bearing deposits.  Average money market account balances increased $18.8 million, from $28.8 million for the quarter ended June 30, 2006 to $47.6 million for the quarter ended June 30, 2007.  Over those respective quarters the average costs for those balances increased 39 basis points, from 4.62% to 5.01%.  The average balances and costs of the Bank’s certificates of deposit portfolio increased to $18.4 million at an average cost of 5.03% over the quarter ended June 30, 2007, from $15.6 million at an average cost of 4.52% over the same quarter ended one-year earlier.  For the quarter ended June 30, 2007, the average balance of the Company’s borrowed funds was $68,000 and its average cost was 8.25%.  These borrowed funds were used by the Company to fund its formation costs and subsequent expenses.  Since the Company was formed during the quarter ended September 30, 2006, there were no borrowed funds during the quarter ended June 30, 2006.

Net Interest Income.  Net interest income was approximately $666,000 for the quarter ended June 30, 2007 as compared to $509,000 for the same quarter in the prior year.  The Bank’s average interest rate spread increased to 2.10% for the quarter ended June 30, 2007 from 1.91% for the quarter ended June 30, 2006, while the net interest margin decreased to 2.94% from 3.07%, over the same respective periods.

Provision for Loan Losses.  For the three months ended June 30, 2007 the provision for loan losses was $5,000 as compared to $18,000 for the three months ended June 30, 2006, which was higher primarily because the portfolio’s net loan growth was greater in 2006 than in 2007.  Moreover, as a result of its analysis of the adequacy of the allowance for loan losses, the Company also determined that an increased provision was not warranted because the loan portfolio’s overall risk profile at June 30, 2007 had improved as compared to June 30, 2006.

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Non-interest Income.  Non-interest income for the quarter ended June 30, 2007 was approximately $141,000 as compared to $77,000 for the quarter ended June 30, 2006.  Service charges and fees increased $59,000 from $22,000 in 2006 to $81,000 in 2007 primarily as a result of the Bank’s increased number of customer relationships.  The net gain on sale of real estate mortgages held for sale decreased to $49,000 from $53,000 primarily because of a general softening in the overall housing market evident this year relative to last.  Other non-interest income categories increased to $11,000 from $2,000 primarily from annuity sales and rent earned from subletting excess office space.

Non-interest Expense.  Non-interest expense for the quarter ended June 30, 2007 increased $68,000 when compared to the same quarter in 2006.  Compensation and benefits increased $15,000 primarily from salary increases necessary to attract and retain an experienced staff committed to originating and servicing an increased number of loan and deposit customer relationships.  Data processing service fees increased $8,000 because of the added expense required to service the Bank’s larger customer base.  Occupancy and equipment expense decreased $13,000 primarily because higher maintenance costs incurred in the quarter ended June 30, 2006 were unnecessary in the same quarter of the current year.  Other non-interest expense increased to $287,000 for the quarter ended June 30, 2007 from $229,000 for the quarter ended June 30, 2006.  The $58,000 increase was primarily due to increases in professional and consulting fees, advertising, shareholder communications, and other operating expenses related to the expansion of the Bank’s business activities, and the introduction of online banking to the Bank’s account holders.

Income Tax Expense.  We receive no tax benefit from our net operating losses as they are being carried forward and will be available to reduce future taxable income.

Results of Operations for the Six Months Ended June 30, 2007 and June 30, 2006

General.  For the six months ended June 30, 2007, the Bank recognized a net loss of $327,000, or ($0.19) per diluted share, as compared to a net loss of $663,000, or ($0.39) per diluted share, for the comparable six-month period ended one year earlier.  The $336,000 improvement is primarily the result of increased interest and non-interest income attributable to the Bank’s larger asset size and the investment of cash into higher yielding assets, which was partially mitigated by higher funding costs and increased operating expenses.

Interest Income.  Compared to the first six months of 2006, interest income for the six-month period ended June 30, 2007 increased $1.2 million, or 63.2%, to $3.1 million from $1.9 million.  The increase was primarily attributable to the increase in average interest-earning assets to $89.8 million for the six-month period ended June 30, 2007 from $61.4 million for the comparable six-month period ended one year earlier, and to the higher yields associated with those assets.  Over the comparable periods average loan balances increased from $41.0 million to $65.3 million, while their average yield increased from 6.94% to 7.48%.  The average balances of the securities available for sale decreased by $435,000 from $8.3 million to $7.9 million, while the average balances of its fed funds and other investments increased by nearly $1.2 million from $9.1 million to $10.3 million, over the six-month period ended June 30, 2007 as compared to the same six-month period in the previous year.  As a result of higher yields, the interest earned by both asset categories increased $9,000 and $53,000, respectively, over the comparable six-month periods.  During the six-month period ended June 30, 2007 the Bank increased its investment in a variety of certificates of deposit at other financial institutions with maturities ranging from three to twelve months.  The average balance and average yield of this asset segment was $6.0 million and 5.43%, respectively.  By comparison, the average balance and average yield of the Bank’s certificates of deposit was $2.5 million and 4.92%, respectively, for the six-month period ended June 30, 2006.

Interest Expense.  Total interest expense for the six-month period ended June 30, 2007 increased by $863,000 when compared to the six-month period ended June 30, 2006.  The increase was primarily due to an increase in the average balances of interest-bearing deposits, which increased from $43.3

16

million over the six-month period ended June 30, 2006 to nearly $74.0 million over the six-month period ended June 30, 2007, and an increase in the average costs from 4.22% to 4.82% associated with those deposits over the same respective periods.  Average money market account balances increased $24.4 million, from $24.0 million for the six-month period ended June 30, 2006 to $48.4 million for the same six-month period ended one year later.  Over those respective periods, the average costs for those balances increased 63 basis points, from 4.38% to 5.01%.  The average balances of the Bank’s certificates of deposit increased $3.1 million, from $15.1 million over the six-month period ended June 30, 2006 to $18.2 million over the six-month period ended June 30, 2007.  The average cost of those deposits increased to 5.02% from 4.48% over the same respective periods.

Provision for Loan Losses.  The provision for loan losses for the six months ended June 30, 2007 decreased $41,000 compared to the six months ended June 30, 2006 primarily because the portfolio’s net loan growth was greater in 2006 than in 2007, and, as discussed previously, following its analysis of the adequacy of the allowance for loan losses, the Company determined that an increased provision was not warranted because the loan portfolio’s overall risk profile at June 30, 2007 had improved as compared to June 30, 2006.

Net Interest Income.  Net interest income was approximately $1.3 million for the six-month period ended June 30, 2007 as compared to $973,000 for the six-month period ended June 30, 2006.  The average interest rate spread increased to 2.03% from 1.96%, while the net interest margin decreased to 2.86% from 3.20%, over the same comparable periods

Non-Interest Income.  Non-interest income for the six-month period ended June 30, 2007 totaled $244,000, which represented an increase of $85,000 from the $159,000 earned over the six-month period ended June 30, 2006.  Most of the change resulted from a $113,000 increase in service charges and fees earned from an increased number of deposit and loan customer relationships that was mitigated by a $48,000 decrease in the net gain on the sale of real estate mortgage loans held for sale that decreased because of a decrease in real estate mortgage loan sale activity.  There was also a $20,000 increase in other categories of non-interest income, attributable, primarily, to increased earnings from the sale of annuities and rent earned from subletting excess office space

Non-Interest Expense.  Non-interest expense for the six-month period ended June 30, 2007 increased $100,000 to $1.8 million from $1.7 million for the six-month period ended June 30, 2006.  Compensation and benefits increased $13,000, or 1.4%, from salary increases necessary to attract and retain an experienced staff committed to originating and servicing an increased number of loan and deposit customer relationships.  Occupancy and equipment expense decreased $4,000 primarily because higher maintenance costs incurred over the six-month period ended June 30, 2006 were unnecessary in the same six-month period of the current year.  Data processing service fees increased $16,000 because of the added expense required to service the Bank’s larger customer base.  Other non-interest expense increased to $510,000 for the six-month period ended June 30, 2007 from $435,000 for the comparable six-month period ended June 30, 2006.  The $75,000 increase was primarily due to increases in professional and consulting fees, advertising, shareholder communications, and other operating expenses related to the expansion of the Bank’s business activities and introduction of online banking as stated earlier.

Liquidity and Capital Resources

The primary sources of funds are deposits, capital, proceeds from the sale of loans, and principal and interest payments on loans and securities.  While maturities and scheduled payments on loans and securities provide an indication of the timing of the receipt of funds, other sources of funds such as loan prepayments and deposit inflows are less predictable due to the effects of changes in interest rates, economic conditions and competition.

The primary investing activities of the Company are the origination of loans and the purchase of investment securities.  For the six months ended June 30, 2007, the Company originated loans of

17

approximately $21.5 million including real estate mortgage loans held for sale.  At June 30, 2007, the Company had outstanding loan origination commitments of $19.5 million (including one-to-four-family real estate mortgage loans held for sale of $1.9 million) and undisbursed lines of credit and construction loans in process of $11.1 million.  The Company anticipates that it will have sufficient funds available to meet its current loan originations and other commitments.

At June 30, 2007, total deposits were approximately $87.6 million of which approximately $22.0 million was in certificates of deposit.  Certificates of deposit scheduled to mature in one year or less from June 30, 2008 totaled $13.7 million.  Based on past experience the Company anticipates that most such certificates of deposit can be renewed upon their expiration.

As stated earlier, the Company completed the holding company formation during the quarter ended September 30, 2006.  In order to pay the various costs associated with the formation, as well as other subsequent expenses as incurred, the Company secured a credit facility of $200,000 from its wholesale correspondent bank, Atlantic Central Bankers Bank, of which the Company exercised $84,000.

While the Bank has not borrowed funds since it commenced operations, it may do so in the future based upon its need for funds and the cost of deposits as an alternative source of funds.  In general the Bank manages its liquidity by maintaining sufficient levels of short-term investments so that funds are available for investment in loans when needed.  The Bank monitors its liquidity on a regular basis.  Excess liquidity is invested in overnight federal funds sold and other short-term investments.  The Bank has unused credit lines of $5.0 million with its correspondent bank, Atlantic Central Bankers Bank, which is separate from the Company’s credit facility mentioned above.

OCC regulations require banks to maintain a minimum leverage ratio of core (Tier 1) capital to total adjusted tangible assets of 3.0%, and a minimum ratio of total capital (core capital and supplementary capital) to risk-weighted assets of 8.0%, of which 4.0% must be core (Tier 1) capital.

Under its prompt corrective action regulations, the OCC is required to take certain supervisory actions with respect to an undercapitalized institution.  The regulations establish a framework for the classification of depository institutions into five categories: (1) well-capitalized, (2) adequately capitalized, (3) undercapitalized, (4) significantly undercapitalized, and (5) critically undercapitalized.  Generally an institution is considered well capitalized if it has a core (Tier 1) capital ratio of at least 5.0%, a core (Tier 1) risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of a least 10.0%.  As of June 30, 2007, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  There are no conditions or events since that notification that management believes have changed the institution’s category.

The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by the OCC about capital components, risk weightings and other factors.

Management believes that, as of June 30, 2007 and December 31, 2006, the Bank met all capital adequacy requirements to which it was subject.

The following is a summary of the Bank’s actual capital amounts and ratios, compared to the OCC requirements for minimum capital adequacy and for classification as a well-capitalized institution at June 30, 2007 and December 31, 2006.  The capital ratios of the Company are not significantly different than those shown in the table below for the Bank and exceed the requirements to be well capitalized.  In accordance with the applicable regulatory requirements, the Bank’s actual tangible and Tier 1 capital amounts exclude goodwill, while the total risk-based capital amounts include the allowance for loan losses.

18

						Minimum Capital					Classification as
	Bank Actual					Adequacy					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
June 30, 2007
Tier I (core)capital	$	10,239		10.3	%	$	2,973		3.0	%	$	4,955		5.0	%
Risk-based capital:
Tier I		10,239		13.2		N/A		N/A				4,657		6.0
Total		10,829		14.0			6,209		8.0			7,761		10.0

						Minimum Capital					Classification as
	Bank Actual					Adequacy					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2006
Tier I (core)capital	$	10,522		11.3	%	$	2,791		3.0	%	$	4,652		5.0	%
Risk-based capital:
Tier I		10,522		15.2		N/A		N/A				4,145		6.0
Total		11,103		16.1			5,527		8.0			6,908		10.0

Recent Accounting Standards

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements.  This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset.  The standard is effective for fiscal years beginning after November 15, 2007.  The Company has not completed its evaluation of the impact of the adoption of this standard.

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment to FASB Statements No. 133 and 140.”  This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interest in securitized financial assets and other items.  The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006.  The Company has determined the adoption of this Statement does not have a material impact on the Company’s consolidated financial position or results of operations.

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140.”  This Statement provides the following:  1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes inn fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a one time reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to change in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures.  This standard is effective as of the

19

beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative effect adjustment to retained earnings.  The Company has determined the adoption of this Statement does not have a material impact on the Company’s consolidated financial position or results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS No. 159”).  SFAS No. 159 permits entities to choose to measure certain financial assts and financial liabilities at fair value.  SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007.  The Company has not completed its evaluation of the impact of this Statement on the Company’s consolidated financial position or results of operations.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company adopted FIN 48 as of January 1, 2007.  A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.  The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.  For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.  The adoption had no affect on the Company’s consolidated financial position or results of operations.  The Company is no longer subject to examination by taxing authorities for years before 2002.  The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company and its subsidiary are subject to U.S. federal income tax as well as income tax of the state of New York.  The Company does not expect the total amount of tax benefits to significantly increase in the next twelve months.

Item 3.   Controls and Procedures

The Company has adopted interim disclosure controls and procedures designed to facilitate the Company’s financial reporting.  The interim disclosure controls currently consist of communications among the Chief Executive Officer, the Chief Operations Officer, the Chief Financial Officer and each department head to identify any transactions, events, trends, risks or contingencies which may be material to the Company’s operations.  In addition, the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and the Audit Committee meet on a quarterly basis and discuss the Company’s material accounting policies.  The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of these interim disclosure controls as of June 30, 2007 and found them to be adequate.

The Company maintains internal control over financial reporting.  There have not been any significant changes in such internal control over financial reporting that have materially been affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

Item 1.   Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  At June 30, 2007, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.

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Item 2.   Unregistered Sales of Securities and Use of Proceeds

None

Item 3.   Defaults on Senior Securities

None

Item 4.   Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders was held on May 3, 2007.  The matters considered and voted on at the annual meeting and the vote of the stockholders were as follows:

Proposal No. 1

The election of directors, each for a three-year term.

	For	Withheld
William W. Davenport	989,294	6,750
Peter B. Ferrante	994,294	1,750
Andrew G. Finkelstein	994,294	1,750
Gale L. Foster	994,294	1,750
Thomas D. Weddell	994,294	1,750

Proposal No. 2

The ratification of the appointment of Crowe Chizek and Company LLC as auditors for the Company for the year ending December 31, 2007.

	For	Against	Abstain
Number of Votes	991,044	250	4,750
Percentage of shares voted	99.50%	0.02%	0.48%

Item 5.   Other Information

None

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Item 6.   Exhibits

		Reference to Previous Filing
Exhibit Number	Document	If Applicable
3.1	Articles of Incorporation	*
3.2	Amended Bylaws	*
4	Form of Stock Certificate	**
10.1	Employment Agreement dated September 23, 2004 Between the Bank and Anthony P. Costa.	**
10.2	Employment Agreement dated September 23, 2004 Between the Bank and Philip Guarnieri	**
10.3	Employment Agreement dated October 20, 2005 Between the Bank and Arthur Budich	**
10.4	Empire State Bank, N.A. 2004 Stock Option Plan	**
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Previously filed with the SEC as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the period ended September 30, 2006.

** Previously filed with the SEC as an exhibit to the Company’s Registration Statement on Form S-4 filed on April 14, 2006 and subsequently amended on April 18, 2006, May 1, 2006 and May 23, 2006 and a post-effective amendment filed on June 9, 2006.  All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), the registrant caused this report to be signed on its behalf by the undersigned, hereunto duly authorized, as of August 13, 2007.

	Empire State Bank, National Association
Date:  August 13, 2007	By:	/s/ Anthony P. Costa
		Anthony P. Costa
		Chairman and Chief Executive Officer

Date:  August 13, 2007	By:	/s/ Arthur W. Budich
		Arthur W. Budich
		Executive Vice President and Chief Financial Officer

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